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TDG > SEC Filings for TDG > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for TRANSDIGM GROUP INC


8-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company's financial condition and results of operations should be read together with TD Group's consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. References in this section to "TransDigm," "the Company," "we," "us," "our," and similar references refer to TD Group, TransDigm Inc. and TransDigm Inc.'s subsidiaries, unless the context otherwise indicates. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in this report. These risks could cause our actual results to differ materially from any future performance suggested below.

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, the statements about the Company's plans, strategies and prospects under this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, the Company can give no assurance that such plans, intentions or expectations will be achieved. Many of the factors affecting these forward-looking statements are outside the control of the Company. Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. The Company does not undertake, and specifically declines, any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by applicable law. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements.

Important factors that could cause actual results to differ materially from the forward-looking statements made in this Quarterly Report on Form 10-Q include but are not limited to: the sensitivity of our business to the number of flight hours that our customers' planes spend aloft and our customers' profitability, both of which are affected by general economic conditions; future terrorist attacks; our reliance on certain customers; the U.S. defense budget and risks associated with being a government supplier; failure to maintain government or industry approvals; failure to complete or successfully integrate acquisitions; our substantial indebtedness; potential environmental liabilities; and other factors. Please refer to the other information included in this Quarterly Report on Form 10-Q and to the Annual Report on Form 10-K for additional information regarding the foregoing factors that may affect our business.

Overview

We believe we are a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. Our business is well diversified due to the broad range of products we offer to our customers. Some of our more significant product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, , include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, NiCad batteries and chargers, engineered latching and locking devices, rods and locking devices, engineered connectors and elastomers, cockpit security components and systems, specialized cockpit displays, aircraft audio systems, specialized lavatory components, seatbelts and safety restraints, engineered interior surfaces and lighting and control technology. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.

For the second quarter of fiscal 2013, we generated net sales of $465.6 million and net income of $67.9 million. EBITDA As Defined was $219.3 million, or 47.1% of net sales. See below for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to net income and net cash provided by operating activities.

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Certain Acquisitions

Aero-Instruments Co., LLC Acquisition

On September 17, 2012, TransDigm Inc. acquired all of the outstanding equity interests in Aero-Instruments Co., LLC ("Aero-Instruments"), for approximately $34.6 million in cash, which includes a purchase price adjustment of $0.1 million received in the first quarter of fiscal 2013. Aero-Instruments designs and manufactures highly engineered air data sensors including pitot probes, pitot-static probes, static pressure ports, angle of attack, temperature sensors and flight test equipment for use primarily in the business jet and helicopter markets. These products fit well with TransDigm's overall business direction. The Company is in the process of obtaining information to value certain tangible and intangible assets of Aero-Instruments, and therefore the condensed consolidated financial statements at March 30, 2013 reflect a preliminary purchase price allocation for the business.

AmSafe Global Holdings, Inc. Acquisition

On February 15, 2012, TransDigm Inc. acquired all of the outstanding stock of AmSafe Global Holdings, Inc. ("AmSafe"), for approximately $749.7 million in cash, which includes a purchase price adjustment of $0.5 million paid in the third quarter of fiscal 2012. AmSafe is a leading supplier of innovative, highly engineered and proprietary safety and restraint equipment used primarily in the global aerospace industry. These products fit well with TransDigm's overall business direction. The distribution business acquired as part of AmSafe was sold on August 16, 2012 for approximately $17.8 million in cash, which includes a working capital adjustment of $0.1 million received in the first quarter of fiscal 2013. The equity investment in C-Safe LLC acquired as part of AmSafe was sold in October 2012 for approximately $16.4 million, which consisted of $5.0 million in cash at closing and an $11.4 million short term note receivable, of which $5.5 million was collected in the second quarter of fiscal 2013.

Harco Laboratories Acquisition

On December 9, 2011, TransDigm Inc. acquired all of the outstanding stock of Harco Laboratories, Incorporated ("Harco"), for approximately $83.3 million in cash, which includes a purchase price adjustment of $0.4 million paid in the second quarter of fiscal 2012. Harco designs and manufactures highly engineered thermocouples, sensors, engine cable assemblies and related products for commercial aircraft. These products fit well with TransDigm's overall business direction.

Non-GAAP Financial Measures

We present below certain financial information based on our EBITDA and EBITDA As Defined. References to "EBITDA" mean earnings before interest, taxes, depreciation and amortization, and references to "EBITDA As Defined" mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and EBITDA As Defined and the reconciliations of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below.

Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under accounting principles generally accepted in the United States of America ("GAAP"). We present EBITDA and EBITDA As Defined because we believe they are useful indicators for evaluating operating performance and liquidity.

Our management believes that EBITDA and EBITDA As Defined are useful as indicators of liquidity because securities analysts, investors, rating agencies and others use EBITDA to evaluate a company's ability to incur and service debt. In addition, EBITDA As Defined is useful to investors because our revolving credit facility under our senior secured credit facility requires compliance, on a pro forma basis, with a financial covenant that measures the ratio of the amount of our secured indebtedness to the amount of our Consolidated EBITDA defined in the same manner as we define EBITDA As Defined herein. This financial covenant is a material term of our senior secured credit facility as the failure to comply with such financial covenant could result in an event of default in respect of the revolving credit facility (and such an event of default could, in turn, result in an event of default under the indentures governing our 7 3/4% Senior Subordinated Notes and 5 1/2% Senior Subordinated Notes).

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In addition to the above, our management uses EBITDA As Defined to review and assess the performance of the management team in connection with employee incentive programs and to prepare its annual budget and financial projections. Moreover, our management uses EBITDA As Defined to evaluate acquisitions.

Although we use EBITDA and EBITDA As Defined as measures to assess the performance of our business and for the other purposes set forth above, the use of these non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance with GAAP. Some of these limitations are:

neither EBITDA nor EBITDA As Defined reflects the significant interest expense, or the cash requirements necessary to service interest payments, on our indebtedness;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor EBITDA As Defined reflects any cash requirements for such replacements;

the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA and EBITDA As Defined;

neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a necessary element of our operations; and

EBITDA As Defined excludes the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions.

Because of these limitations, EBITDA and EBITDA As Defined should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or EBITDA As Defined in isolation and specifically by using other GAAP measures, such as net income, net sales and operating profit, to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance with GAAP. Our calculation of EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.

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The following table sets forth a reconciliation of net income to EBITDA and EBITDA As Defined (in thousands):

                                          Thirteen Week Periods Ended                 Twenty-Six Week Periods Ended
                                        March 30,             March 31,              March 30,              March 31,
                                           2013                  2012                  2013                   2012
                                                 (in thousands)                               (in thousands)
Net income                            $       67,937        $       81,552        $       142,107        $       146,657
Adjustments:
Depreciation and amortization
expense                                       16,321                15,247                 33,773                 33,029
Interest expense, net                         64,094                52,300                126,970                101,361
Income tax provision                          31,800                43,375                 67,600                 74,475

EBITDA                                       180,152               192,474                370,450                355,522
Adjustments:
Inventory purchase accounting
adjustments(1)                                   -                   5,308                    890                  8,459
Acquisition integration costs(2)               1,027                   832                  2,946                  3,384
Acquisition transaction-related
expenses(3)                                      681                 2,399                  1,339                  4,148
Other acquisition accounting
adjustments                                      -                  (2,792 )                  -                   (2,792 )
Non-cash compensation costs(4)                 7,131                 4,887                 14,262                  8,535
Refinancing costs(5)                          30,281                   -                   30,281                    -

EBITDA As Defined                     $      219,272        $      203,108        $       420,168        $       377,256

(1) Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.

(2) Represents costs incurred to integrate acquired businesses and product lines into TD Group's operations, facility relocation costs and other acquisition-related costs.

(3) Represents transaction-related costs comprising deal fees; legal, financial and tax due diligence expenses; and valuation costs that are required to be expensed as incurred.

(4) Represents the compensation expense recognized by TD Group under our stock option plans.

(5) Represents debt issue costs expensed in conjunction with the refinancing of our 2010 Credit Facility and 2011 Credit Facility in February 2013.

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The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined (in thousands):

                                                             Twenty-Six Week Period
                                                                      Ended
                                                          March 30,          March 31,
                                                             2013               2012
                                                                 (in thousands)
Net Cash Provided by Operating Activities                $    197,289       $    164,962
Adjustments:
Changes in assets and liabilities, net of effects
from acquisitions of businesses                                (4,462 )            1,299
Interest expense, net (1)                                     120,004             95,620
Income tax provision - current                                 62,118             77,945
Non-cash equity compensation (2)                              (14,262 )           (8,535 )
Excess tax benefit from exercise of stock options              40,044             24,231
Refinancing costs (6)                                         (30,281 )               -

EBITDA                                                        370,450            355,522
Adjustments:
Inventory purchase accounting adjustments (3)                     890              8,459
Acquisition integration costs (4)                               2,946              3,384
Acquisition transaction-related expenses (5)                    1,339              4,148
Other acquisition related expenses                                 -              (2,792 )
Stock option expense (2)                                       14,262              8,535
Refinancing costs (6)                                          30,281                 -

EBITDA As Defined                                        $    420,168       $    377,256

(1) Represents interest expense excluding the amortization of debt issue costs and note premium and discount.

(2) Represents the compensation expense recognized by TD Group under our stock option plans.

(3) Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.

(4) Represents costs incurred to integrate acquired businesses and product lines into TD Group's operations, facility relocation costs and other acquisition-related costs.

(5) Represents transaction-related costs comprising deal fees; legal, financial and tax due diligence expenses; and valuation costs that are required to be expensed as incurred.

(6) Represents debt issue costs expensed in conjunction with the refinancing of our 2010 Credit Facility and 2011 Credit Facility in February 2013.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP, which often requires the judgment of management in the selection and application of certain accounting principles and methods. Management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations. However, investors are cautioned that the sensitivity of financial statements to these methods, assumptions and estimates could create materially different results under different conditions or using different assumptions.

A summary of our significant accounting policies and estimates is included in the Annual Report on Form 10-K for the year ended September 30, 2012. There have been no significant changes to our critical accounting policies during the twenty-six week period ended March 30, 2013.

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Results of Operations

The following table sets forth, for the periods indicated, certain operating
data of the Company, including presentation of the amounts as a percentage of
net sales (amounts in thousands):



                                                               Thirteen Week Periods Ended
                                        March 30, 2013        % of Sales         March 31, 2012        % of Sales
Net sales                              $        465,609             100.0 %     $        423,469             100.0 %
Cost of sales                                   206,299              44.3                187,429              44.3
Selling and administrative expenses              55,463              11.9                 49,474              11.6
Amortization of intangible assets                 9,735               2.1                  9,339               2.2

Income from operations                          194,112              41.7                177,227              41.9
Interest expense, net                            64,094              13.8                 52,300              12.4
Refinancing costs                                30,281               6.5                    -                 -
Income tax provision                             31,800               6.8                 43,375              10.2

Net income                             $         67,937              14.6 %     $         81,552              19.3 %

                                                              Twenty-Six Week Periods Ended
                                        March 30, 2013        % of Sales         March 31, 2012        % of Sales
Net sales                              $        896,027             100.0 %     $        775,942             100.0 %
Cost of sales                                   398,170              44.4                340,347              43.9
Selling and administrative expenses             110,624              12.3                 91,324              11.8
Amortization of intangible assets                20,275               2.3                 21,778               2.8

Income from operations                          366,958              41.0                322,493              41.6
Interest expense, net                           126,970              14.2                101,361              13.1
Refinancing costs                                30,281               3.4                    -                 -
Income tax provision                             67,600               7.5                 74,475               9.6

Net income                             $        142,107              15.9 %     $        146,657              18.9 %

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Changes in Results of Operations

Thirteen week period ended March 30, 2013 compared with the thirteen week period ended March 31, 2012.

Net Sales. Net organic sales, acquisition sales and sales of the AmSafe distribution business, which was acquired as part of AmSafe on February 15, 2012 and sold on August 16, 2012, and the related dollar and percentage changes for the thirteen week periods ended March 30, 2013 and March 31, 2012 were as follows (amounts in millions):

                                          Thirteen Week Periods Ended
                                         March 30,            March 31,                             % Change
                                           2013                  2012            Change           Total  Sales
Organic sales                         $         425.9        $      418.6       $     7.3                   1.7 %
Acquisition sales                                39.7                 -              39.7                   9.4 %
AmSafe distribution sales                         -                   4.9            (4.9 )                -1.1 %

                                      $         465.6        $      423.5       $    42.1                  10.0 %

Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their acquisition dates. The amount of acquisition sales shown in the table above resulted from the acquisition in fiscal 2013 and Aero-Instruments and AmSafe in fiscal 2012.

The organic sales growth was primarily due to an increase of $8.3 million, or a 6.4% increase in commercial OEM sales and an increase of $6.1 million, or a 6.2% increase in defense sales, for the quarter ended March 30, 2013 compared to the quarter ended March 31, 2012. Commercial aftermarket sales decreased by $3.4 million between periods.

Commercial OEM sales for the quarter ended March 31, 2012 were favorably impacted by retroactive contract pricing adjustments of approximately $6 million.

Cost of Sales and Gross Profit . Cost of sales increased by $18.9 million, or 10.1%, to $206.3 million for the quarter ended March 30, 2013 compared to $187.4 million for the quarter ended March 31, 2012. Cost of sales and the related percentage of total sales for the thirteen week periods ended March 30, 2013 and March 31, 2012 were as follows (amounts in millions):

                                            Thirteen Week Periods Ended
                                          March 30,             March 31,
                                             2013                  2012            Change         % Change
Cost of sales - excluding
acquisition-related costs below          $      205.3          $      181.3        $  24.0             13.2 %
% of total sales                                 44.1 %                42.8 %

Inventory purchase accounting
adjustments                                       -                     5.3           (5.3 )         -100.0 %
% of total sales                                  0.0 %                 1.3 %

Acquisition integration costs                     1.0                   0.8            0.2             25.0 %
% of total sales                                  0.2 %                 0.2 %


Total cost of sales                      $      206.3          $      187.4        $  18.9             10.1 %

% of total sales                                 44.3 %                44.3 %


Gross profit                             $      259.3          $      236.0        $  23.3              9.9 %

Gross profit percentage                          55.7 %                55.7 %

The increase in the dollar amount of cost of sales during the thirteen week period ended March 30, 2013 was primarily due to increased volume associated with the sales from acquisitions and organic sales growth offset by lower acquisition-related costs as shown in the table above.

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Gross profit as a percentage of sales was 55.7% for both the thirteen week periods ended March 30, 2013 and March 31, 2012. The dollar amount of gross profit increased by $23.3 million, or 9.9%, for the quarter ended March 30, 2013 compared to the comparable quarter last year due to the following items:

Gross profit on the sales from the acquisitions indicated above (excluding acquisition-related costs) was approximately $18 million for the quarter ended March 30, 2013, which represented gross profit of approximately 46% of the acquisition sales.

Impact of lower inventory purchase accounting adjustments and acquisition integration costs charged to cost of sales of approximately $5 million.

Organic sales growth described above, application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure, and providing highly engineered value-added products to customers), and positive leverage on our fixed overhead costs spread over a higher production volume, partially offset by unfavorable OEM versus aftermarket sales mix, resulted in a net increase in gross profit of approximately $6 million for the quarter ended March 30, 2013.

The gross profit increase described above was partially offset by the impact of an OEM retroactive contract pricing adjustments of approximately $6 million in the comparable quarter of the prior year.

Selling and Administrative Expenses. Selling and administrative expenses increased by $6.0 million to $55.5 million, or 11.9% of sales, for the thirteen week period ended March 30, 2013 from $49.5 million, or 11.6% of sales, for the thirteen week period ended March 31, 2012. Selling and administrative expenses and the related percentage of total sales for the thirteen week periods ended March 30, 2013 and March 31, 2012 were as follows (amounts in millions):

. . .

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